That export cushion is fast losing air

Boatbuilders expect to see stagnant overseas markets until U.S. leads the way out of recession

Overseas sales, a cushion for U.S. boatbuilders in the early stages of the recession, are proving only a temporary respite, just as many of the manufacturers had predicted.

Hard numbers from the federal government confirm the decline in export sales many boatbuilders say they have been experiencing starting in the fourth quarter of 2008.

David Hensel, marketing director for Seattle-based Grand Banks Yachts, says he realized the world was following the United States into recession as he listened to the radio last May during a cab ride back to the airport from the Sanctuary Cove Boat Show.

“From hearing them talk, I could tell it was the beginning of the downturn,” Hensel says. “That was the beginning of the end in terms of the strength of the overseas market.

“Now, there’s not a market around the world you can point to and say it’s a really strong market,” Hensel says. “There’s no real avenue to help bolster sales, at least geographically.”

The numbers

Exports of yachts and other recreational vessels (including rowboats) declined 36 percent between August and December 2008 – from $170 million in sales to $109 million. The biggest drop came between November and December, when sales plummeted from $150 million to $109 million.

There was a slight uptick in January to $114 million, according to Eric Huether, chief economist with the National Association of Manufacturers. But that number was still 32 percent less than the $168 million recorded in January 2008.

And in February, exports slumped another 5 percent to less than $108 million, according to the most recent U.S. Census data.

The deterioration in most of the developed world “is spreading to South America as well as Asia,” Huether says.

For the economy as a whole, overseas GDP is expected to fall between 4 and 6 percent this year, Huether says.

“There’s a distinct possibility that we could see double-digit declines this year,” he cautions.

Canada slippage

Sales to Canada, by far the leading foreign outlet for American-made boats, declined 52.3 percent between January 2008 and January 2009 – from $66 million to $32 million, according to data from the U.S. Census Bureau’s Foreign Trade Division.

That has certainly been felt at Nordic Tugs Inc., says Bob Shamek, dealer sales manager for the Burlington, Wash.-based builder.

“My Canadian dealer in Toronto thought he had several people ready to buy, and they either came to us to buy direct or bought used, because there is such a large quantity of used boats in Canada now,” Shamek says.

Prior to 2008, Canadians often traveled to the U.S. to buy boats, despite the currency difference – usually about $1.25 Canadian for every U.S. dollar. By the time Canadian dealers marked up the boats, it was cheaper to come and get them here, Shamek says.

Around spring 2008, the Canadian and U.S. dollars came close to par, and Nordic Tugs began to see business pick up at its Canadian dealership, Shamek says.

“And then last September or October, the Canadian dollar just dropped again and people close to buying just said, ‘Nope, we’re not going to do it now,’ ” Shamek says.

The Canadian market did rebound 17 percent between January and February, with nearly $37 million worth of American boats purchased.

The dollar amount spent on U.S. vessels in Canada is still more than triple that of Mexico, which now ranks second in U.S. boat exports, with $10.7 million spent in February, data show.

Australia has also been hit hard, dropping from the second-largest importer of U.S.-made boats in November 2008 ($13 million in sales) to the 16th largest ($2.5 million) in February 2009, Census data show.

“I think six months ago, exports were good and helping manufacturers with the downturn in the domestic economy,” says Thom Dammrich, president of the National Marine Manufacturers Association. “But as of today, I’m not sure if that’s true anymore. It just worsens the downturn for the boating industry.”

“The world economies have suffered as bad or worse in some instances [as] the U.S. economy,” says Shamek. The company, he says, completed one boat order in Europe in the last six months, and “I don’t see a fast recovery over there, particularly in northern Europe.”

Japan has been a brighter spot for Nordic Tugs. Three boats have been shipped to that country, Shamek says, and the Yokohama Boat Show in March was also fruitful, with two boats sold, and several promising leads. Those results are a pleasant surprise, Shamek says, since Japan’s economy is also suffering. However, the yen is holding up against the dollar, making American-made boats more attractive.

Last year, exports accounted for about 40 percent of Nordic Tugs’ overall business.

Though some have had success in the Middle East, Shamek says the slump in oil prices has slowed activity in that region. Plans to expand in Russia fell apart after the ruble deteriorated and the plunge in oil revenues dried up luxury spending.

Anecdotally, Shamek says he’s heard of some market expansion by other industries in Central and South America because of loosening credit restraints, but those opportunities have yet to reach boating.

Comatose market

Sabre Yachts of South Casco, Maine, is doing the same percentage of exports as before the downturn – about 25 percent, says marketing and sales vice president Bentley Collins. However, the company is shipping half the dollar amount as a year ago, and that translates into a huge hit.

“The reality is this: The European market fell into its coma just a little bit after ours did, so not only do you have lousy market conditions here, you have really lousy market conditions in Europe, too,” Collins says.

“It’s gone far deeper than anybody would have hoped, and it’s just not recovering. It’s what we call a dead cat at this time; it’s just lying there. There’s a tremendous amount of interest, but nobody’s buying anything.”

Grand Banks sold three of its 41-foot Heritage EU yachts at Germany’s Düsseldorf show in January, Hensel says. The company also generated some leads its dealership in Germany is continuing to follow, Hensel says.

“These days, nothing happens as quickly as it used to,” says Hensel. “Everything is a drawn-out process.” That includes getting customers to free up cash for a down payment, “because they can’t get it out of real estate, or their stocks are down,” he says. “That is the same overseas.”

Like many boatbuilders, Grand Banks became more heavily reliant on sales overseas when the downturn in the U.S. market began. Boats continued to sell in Australia, Europe, Turkey, the Ukraine, Russia, Korea, Hong Kong and Japan.

“A lot of that work we were doing in the last couple years prior to 2008 really paid off by keeping our overall sales high,” says Hensel. “The fiscal year ending March 31, 2008, was a record year for us, even though the U.S. market was already in a decline.”

Grand Banks’ production forecast is less than half what it was last year, and “continues to be a moving target,” Hensel says.

“We came out of Düsseldorf with three sales and thought, ‘Great! Things are looking up.’ But since then it’s been a boat here, a boat there, it’s sporadic,” Hensel says. “We had hoped that show would be indicative of an upswing, at least in our end of the market, but that didn’t really happen. Right now, I don’t see a differentiation between the overseas market and the U.S. market. It is low everywhere.”

A lack of confidence

Hensel and others at Grand Banks continue to speculate on what is driving the downturn by examining the psychology of consumers.

Many people still have the means to buy boats, Hensel says – even some who have lost some money in real estate or in the stock market. They are working with less, but still have substantial sums. The stock market, he believes, has been a principal reason why people are not spending, because it has fluctuated so wildly in the last year.

“People just want to sense that while things are not great, they are not getting worse, so they can get off the sidelines with some confidence that there is a light at the end of the tunnel,” Hensel says. “People will only defer their dreams for so long.”

But many seem to be prepared to hold off for at least a little longer.

One Grand Banks dealer was working a lead on a 59-footer, negotiating with a potential buyer who was more than qualified. They went back and forth, and the dealer dropped the price several times, only to have the prospect say no. When the dealer threw an outrageously low price at him, just out of curiosity, the buyer still said no. Price didn’t matter.

“He just wasn’t comfortable making that kind of purchase,” Hensel says. “Maybe it was the uncertainty, or maybe he didn’t want to be seen buying a big-ticket item when people out there are losing their jobs.”

Frustrating times

Collins relates to the disappointment the Grand Banks dealer must have felt when he couldn’t close the deal.

The source of the frustration, he says, is that, “We’re a nation of people who have always been able to make things happen when [they weren’t] happening,” Collins says. “This is the first time in my working career, 42 years, that I haven’t actually been able to make something happen. We’ve always been able to entice a customer to move on something they were putting off, and now people just aren’t prepared to move on anything.”

Even when Sabre sells a boat today, “If something scary happens, some buyers are backing out,” Collins says. That will lead to demands for bigger deposits in the future and a much heavier commitment on the part of the client, he says.

“We’re into unknown territory,” he cautions.

Collins agrees there is no lack of liquidity, but believes the stock market alone puts people on edge.

“When we have a day like when the Dow Jones goes down for no reason at all by 175 points, any gain we might have had in the last two or three weeks is thrown away,” he says. “There’s no sense anymore; there’s no logic. Until people can open up their 401(k) or their browser and see things are steady, they’re not going to want to buy.”

Still, because of the phone calls Sabre is getting, there does seem to be a pent-up demand, Collins says.

“We go to the boat shows and people express strong interest,” he says. “People do sit down with contracts in front of them, and dealers encourage them to sign, but they then stand up, pick up that piece of paper and say, ‘I’ll let you know.’ They just cannot bring themselves to make that decision.”

Show activity reduced

It was because of that prevailing attitude that Sabre decided to skip the London Boat Show in January – a show at which the company usually displays.

Sabre’s last overseas boat show participation came at last fall’s Genoa and Cannes shows, Collins says. The company dropped Düsseldorf years ago.

Grand Banks also is reconsidering its boat show participation for next year. The builder sold three boats in Düsseldorf this year, but the cost was high.

“Düsseldorf is a hugely expensive show, and is it worthwhile to be there with two boats? Or any boats? Maybe we just have a booth with some flat-screen TVs and a model,” Hensel says. “It’s really understanding and taking a fresh look at what we do. Maybe we don’t need to have a boat next year, especially if we don’t have a new model.”

Because the space at Düsseldorf is so expensive, a number of manufacturers have creative displays without boats, Hensel says.

Leveling off?

Collins is hopeful that the next 30 to 45 days will bring good news in terms of boat sales, and he believes that will be a big industry indicator about the rest of 2009.

“This is a coma, and I really don’t know how you know when a patient is going to come out,” Collins says. “It seems like things have gelled a bit as we get into spring. But I don’t want to be overly optimistic, because I think for the first six or eight months of this thing, people were overly optimistic. So we’re starting to look silly.”

There were some bright spots in February’s Census data, even though the numbers seemed, in some cases, to fluctuate wildly from month to month in many countries.

Mexico saw almost 62.5 percent growth from January’s export sales. Italy’s numbers were up 37 percent from January, and Turkey’s rose more than 962 percent, from $310,810 in January to more than $3.6 million in February. Russia leapt 377 percent, from $552,447 in January to $2.6 million in February.

“It’s almost the same kind of interest we’re getting in the States,” Collins says. “There are a few more inquiries from England, and Italy and Spain and France – all those countries that wake up to springtime,” Collins says. “We’re seeing that seasonal uptick that we would see every year, but there is still nothing of any consequence being done.”

In one example of an unstable market, people in the United Arab Emirates spent about a million dollars on American boats in December 2008. That amount skyrocketed to nearly $22 million in January 2009, but then plummeted back down to just over a million dollars in February – a 94 percent decline.

“I’m encouraged personally by the aggressive measures the government is taking to get us out of this situation,” he says. “I’m hoping those measures translate into a shorter trip to the bottom and a quicker path back up to normalcy, whatever that is.”

Dammrich thinks the U.S. economy is near the bottom if it isn’t already there, and thinks by the end of 2009 we will have seen some upturn in the economy and will probably see some upturn in boating.

“There is no question the rest of the world is waiting for America to recover,” Dammrich says. “I think the world will probably follow maybe six to 12 months after.”

Shamek says Nordic Tugs still has big plans for overseas.

“There are still markets we plan to pursue and expand on, even if it’s not happening as fast as we’d like,” he says.